Has Switzerland Really Caved to US Pressure?

Nick Giambruno: Today we're talking with Frank Suess, CEO of BFI Capital Group, a Swiss-based wealth planning and management service. Recently, the Swiss government announced that Swiss banks will be allowed to provide more confidential information to US authorities in an attempt to thwart tax evasion. Could you please comment on this?

Frank Suess: This “Tax Deal” still needs to be ratified by the Swiss Parliament. At this point, some of the details of the agreement are still unclear or are being held secret. In particular, the formula of calculating possible penalties that Swiss banks may have to shoulder has not been communicated. The agreement demands a tight timeline, forcing the Swiss to decide on the matter in a very short period of time. Obviously, many members of the Swiss Parliament are not happy, to say the least.

In summary, the deal resembles a kind of temporary peace accord. It serves the purpose of giving Swiss banks and their employees a pre-defined procedure and time window during which they can submit themselves to US justice and provide the US with account data without breaching Swiss banking secrecy rules. During a period of 120 days, counting down once the details of the accord are communicated, the US has committed to not suing any more Swiss banks.

It is important to note here that no detailed individual client information will be provided. Individual client data remains secret and will continue to be available to the US only via the administrative assistance procedures, as defined in the double taxation treaty of 2009. In other words, the provision of providing individual client information – name, address, investments – by the banks is only possible upon decree by the Swiss authorities, and both the clients and the banks have legal rights to avoid such data submission in Swiss courts.

However, the banks are now allowed to provide aggregate account information – primarily number of accounts and value of assets held by US persons and entities. Moreover, the US is keen on receiving so called “Leaver Lists.” These lists will provide aggregate information on which other banks the US accounts and assets have left over the past few years.

Nick: Some commentators have been stating that the Swiss government is selling out and giving in. Is it fair to say that the Swiss government is bending to the power of the US?

Frank: I unfortunately was not privileged enough to have joined at the negotiation table. While at first glance one might assume that the Swiss have sold out, I do believe that the Swiss government has been doing its best to maintain and defend the Swiss rules and values, while also pragmatically dealing with the growing pressure on Swiss banks from US demands.

The US, at the outset of the negotiations, had demanded unconditional delivery of the names of bank clients, employees, fiduciaries, and attorneys involved with US investors. And they demanded enactment of an emergency law to retrospectively – back to 2002 – enable Swiss banking secrecy rules to be waived with regard to US accounts. Furthermore, the US pushed hard for a solution that would exclude the Swiss Parliament or the US Senate from any say.

The Swiss did not really bend to any of those demands. The Swiss government has not bent any Swiss law either. The Swiss Parliament has the option of passing a rule in line with the legislative process that gives Swiss banks and bankers a choice to come clear with the US legal system pro-actively.

Nick: Your way of putting it is certainly different from what we have heard in the news of late. However, do you see this deal as a positive or a negative for Switzerland as a leading financial center? And why would the Swiss government believe that they can trust the US authorities to keep their word that this will end the confrontation?

Frank: I think this deal could help some Swiss banks to come to a quicker, and maybe even better, conclusion on the matter. It might also protect some bankers from being snatched and locked up in hotel rooms by US authorities upon entry to the US. However, I personally don't think it will change the general course or style of the US administration and the IRS in their hunt for so-called “tax cheats.” The US, in conjunction with the OECD and G-20, is pushing for complete and total citizen transparency and an automatic exchange of account data.

Overall, I am not so concerned about the health of the Swiss financial center. It will do well and grow despite the presumed weakening of banking secrecy rules. Other factors such as political stability and fiscal strength continue to position Switzerland as a prime jurisdiction to deposit and manage wealth. I am more concerned about the general global trend of citizen transparency and the continuous depreciation of fundamental rights and freedom.

In Switzerland, we still believe that the state is a servant to the people and that a state can only be trusted as long as the state trusts its people. As soon as the state begins to control, dictate, or even harass its people, also in regard to taxation, the basic principles of freedom and democracy are no longer in place – statism goes against the Swiss values of democracy, as it should in other so-called democratic countries in Europe and in the US as well.

It is important to note that whilst Swiss bank secrecy is already being counted out by mainstream media across the board, the fact is that in Switzerland the resistance to losses of privacy and other fundamental rights based on demands by foreign nations is growing. More and more Swiss, in government and the Swiss Parliament too, are fed up with the pressures emanating from neighboring states and the US, all based on those countries' dismal fiscal situations and overly zealous hunt for tax revenue.

Against this backdrop, an initiative was just launched by some Swiss right-wing political parties that would make bank secrecy a constitutional right. This will certainly make for an interesting debate in Switzerland, amongst other places.

Nick: Do you think that the Switzerland of today is strong enough to withstand the pressure?

Frank: The reason that the Switzerland of today is not part of the EU, has kept its own currency, has achieved budget surpluses over the past years while our neighbors have been drowning in debt, and why Switzerland might have a chance to withstand and not follow the statist and collectivist bandwagon around us – is found only in the Swiss system of direct democracy.

The Swiss people have a say. They vote on specific rules and regulations every three months. They don't simply elect political representatives into government and then hope for the best. They hold those elected accountable on a quarterly basis. That is the best form of democracy I know of today. I believe that this system, in the future, will continue to make a big difference and benefit the people of Switzerland vastly.

Nick: There is a growing fear of gold price manipulation and eventual confiscation/nationalization in many Western countries, including the US, where FDR previously nationalized all gold bullion back in 1933. In your opinion is this a real threat?

Frank: History has ample examples of harsh government policy, financial repression and government intrusion. Rule of law becomes a rarity when public finances are out of balance. A bankrupt state tends to put finances – and elections – above all other values and principles. You don't have to go back far in history for examples. In fact, go back just a few weeks and consider the Cyprus incident in Europe, or the IRS scandals in the US.

As of late, in my view, the price movements of gold have been very interesting. While I don't mind the price of gold going down even a little further – that will give me and our clients more opportunities to buy cheap – one does wonder about the scarcity of gold in the physical markets, while the price was dropping. Clearly, some big investors are stocking up, and it's not just Russia and Kazakhstan.

Nick: Do you have any advice with regard to investing in gold?

Frank: The best way to invest in gold, and to a lesser degree in silver, with the objective of protecting your wealth against a potential financial crisis and system meltdown, is to invest in physical bars and coins. If, moreover, you want to protect yourself from confiscation, you need to keep the gold in safe custody, preferably not with a bank, and definitely outside of your own jurisdiction. You can do that by holding it directly in your name. Or, for added protection, you might consider owning metals via an adequately structured trust, company, or contractual arrangement.

In any case, keeping part of your wealth outside of the jurisdiction you live in, particularly if that jurisdiction shows signs of increasing financial repression, is the only prudent thing to do. That is certainly true when it comes to gold.

We have helped clients invest in and safe-keep precious metals for the past 12 years. We previously used the services offered by banks, or, for unallocated storage, we have used the certificates offered by the Perth Mint. Today, for allocated and segregated storage, we tend to prefer the solution offered by Global Gold in Switzerland.

Nick: What do you think of the recent correction in gold?

Frank: Well, a correction in gold was overdue to some degree. I was a bit surprised by the intensity and scope. However, in the big scheme of things, I think this is a good time to stock up on relatively cheap gold, especially if you hadn't done so earlier. In my view, with literally all the central banks now on board for accelerated monetary expansion and currency depreciation, investing part of your wealth in gold as an insurance against the huge and still-growing fiscal and monetary imbalances is certainly a prudent measure.

The long-term gold uptrend is in place and will be with us for some time – at least until the global debt crisis comes to an end. I don't expect that to happen for several more years.

Nick: Can and should Americans still open Swiss bank accounts and purchase Swiss annuities for currency and jurisdictional diversification, given all the recent press coverage about Switzerland?

Frank: While the US authorities continue to do everything possible to scare American citizens into believing that an offshore account might be illegal, there are manifold reasons for Americans to take advantage of the manifold financial services offered in and from Switzerland.

At BFI, we help international investors set up and maintain structures and strategies that are in compliance with the rules. In that context, establishing a managed account, safe custody of precious metals, or investing in something like a Swiss annuity continues to be something we do not hesitate helping our clients with. Frequently, for Americans in particular, this service might be combined with the setup of an offshore trust or a private placement life insurance solution.

I guess the first question is whether to diversify your wealth offshore or not. As previously mentioned, I think that is a prudent decision in the context of the current big picture. Once you decide to take that step, the question is how you structure yourself offshore, which jurisdictional and institutional choices you make, and what investment strategy suits your needs. And then I would ask where else would you find better service and safer custody of your investments than in Switzerland?

Nick: What does the future hold for the Swiss private banking industry? Do you see a strategy that might help Switzerland protect client privacy and still rid itself of the pressures from abroad?

Frank: Now that Luxembourg and Austria have given up their principles of bank secrecy, the EU spotlight has certainly focused on Switzerland even more. I expect EU pressure, particularly from countries like Germany and France, to grow further. Today, Switzerland is truly the last bastion of meaningful privacy and property rights in Europe. The pledges to share more bank account data – offered up first by Luxembourg, then by Austria last week – were made on the condition that countries outside the European Union, notably Switzerland, do so, too. As more traditional havens fall into line with demands for greater transparency, the Swiss have become more isolated on the topic.

Ultimately, whether Switzerland will be able to retain banking secrecy as it stands today is unsure. However, what has already crystallized, and particularly so over the past few months, is that capital inflows into Swiss banks, insurance companies, and products are on the rise. Most Swiss banks are reporting huge inflows for the first quarter of 2013. Interestingly, much of this is coming from Europe, as well as from Singapore. Therefore, it is clear that today smart money and large investors are no longer as concerned about privacy as they are about safety. And, contrary to the EU banks, the Swiss banks are generally very solid – not to mention the solidity of the Swiss economy and public finances.

Nick: What do you see as the biggest challenge for Swiss banking in the coming years?

Frank: Well, currently, the US Justice Department presents a considerable threat to a few of the Swiss banks, particularly those that, after 2009, accepted US accounts that are undeclared. Here, I believe it will be important for those banks to not simply accept a fault but to ask which laws they breached exactly. As of now, the allegations of wrongdoing, in my view, are too general and broad.

Beyond this instant threat, the biggest challenge is the growing bureaucracy and the costs that come with more and more regulations. Under the pretense of better investor protection and based on the crusade for “tax justice,” the financial industry in Switzerland is coming under increasing pressure. It will particularly be the smaller asset managers and private banks that will find it difficult to cope with all the rules and regulations.

Switzerland has been unique in its variety of institutions and the services offered. I suspect that will change in the coming years. In the past, private banks and independent asset managers would accept clients from a large variety of jurisdictions. As the requirements to understand and comply with all the rules of these different countries grow, I expect a considerable consolidation in Switzerland's financial industry. The regulations clearly skew the advantages in the direction of the larger players, or those who specialize their services to the needs of a clearly limited market.

Nick: How is your firm, BFI, positioned for the future?

Frank: I feel very positive about BFI's future. Demand for our services has been up. We've continued to grow nicely over the past few years, despite the turbulences in financial markets and the flood of new regulations, which have certainly been challenging to manage. I believe that our strategic decision of a few years ago to focus on a few select markets is paying off.

In our role as an independent advisor, we offer Americans and other international clients a comprehensive array of wealth management services and solutions, acting like a family office and one-stop contact point for their international diversification needs.

Contrary to most other institutions in Switzerland, we continue to be committed to working with Americans. As part of that strategy, we regularly travel to the US for client meetings and our Inner Circle Briefings. The next one is coming up on July 10 in Vegas, right before the Freedom Fest there. I invite your readers to meet up with us, and then to visit the FreedomFest.

Nick: Do you have anything else you wish to address or add to the interview?

Frank: Yes. It sure feels like the world is headed in a direction where the state is put above the people. The more rules and bureaucracy that governments thump down on us, the more they control and dictate our daily lives. It's an important topic.

What happens with banking secrecy in Switzerland should not be put off as merely a Swiss issue. It's a global trend and should really concern all of your readers, no matter where they are from. I like the fact that, finally, in America, Rand Paul is questioning things like FATCA and the tax deal with Switzerland. The IRS scandals should also open the eyes of Americans to the fact that they, together with Switzerland, could be the last strongholds of freedom in a world gone deeply socialist and collectivist. I hope you can get a few more Americans to listen and, even better, to speak up.

Nick: Thank you Frank, it is a pleasure to talk with you and gain from your unique Swiss view on the world we live in today and would like remind our readers to check out your site at BFI Capital Group.